FBI fears Bitcoin’s popularity with criminals

There's reportedly $35 million-44 million worth of Bitcoin in circulation.

The FBI sees the anonymous Bitcoin payment network as an alarming haven for money laundering and other criminal activity—including as a tool for hackers to rip off fellow Bitcoin users.

That’s according to a new FBI internal report that leaked to the Internet this week, which expresses concern about the difficulty of tracking the identity of anonymous Bitcoin users, while also unintentionally providing tips for Bitcoin users to remain more anonymous.

In the document, the FBI notes that because Bitcoin combines cryptography and a peer-to-peer architecture to avoid a central authority, contrary to how digital currencies such as eGold and WebMoney operated, law enforcement agencies have more difficulty identifying suspicious users and obtaining transaction records.

Though the Bureau expresses confidence that authorities can still snag some suspects who use third-party Bitcoin services that require customers to submit valid identification or banking information in order to convert their Bitcoins into real-world currencies, it notes that using offshore services that don’t require valid IDs can thwart tracking by law enforcement.

Bitcoin is an online currency that allows buyers and sellers to exchange money anonymously. To “cash-out,” the recipient has to convert the digital cash into US dollars, British pounds or another established currency. Bitcoin is used as a legitimate form of payment by numerous online retailers selling traditional consumer goods, such as clothing and music. But it’s also used by underground sites, such as Silk Road, for the sale of illegal narcotics.

To generate Bitcoins, a user has to download and install a free Bitcoin software client to their computer. The software generates Bitcoin addresses or accounts—a unique 36-character string of numbers and letters—to receive Bitcoin payments. The currency is stored on the user’s computer in a virtual “wallet.” Users can create as many addresses or accounts as they want.

To send Bitcoins, the sender enters the recipient’s address as well as the amount of Bitcoins they want to transfer to the address. The sender’s computer digitally signs the transaction and sends the information to the peer-to-peer Bitcoin network, which validates the transaction in a matter of minutes and releases the coins for the receiver to spend or convert.

The conversion value fluctuates with supply and demand and the trust in the currency. As of last month, there were more than 8.8 million Bitcoins in circulation, according to Bitcoin, with a value of about $4 and $5 per Bitcoin. The FBI estimates in its report that the Bitcoin economy was worth between $35 million-$44 million.

It’s easy to see the attraction for criminals.

“If Bitcoin stabilizes and grows in popularity, it will become an increasingly useful tool for various illegal activities beyond the cyber realm,” the FBI writes in the report. “For instance, child pornography and Internet gambling are illegal activities already taking place on the Internet which require simple payment transfers. Bitcoin might logically attract money launderers, human traffickers, terrorists, and other criminals who avoid traditional financial systems by using the Internet to conduct global monetary transfers.”

Bitcoin transactions are published online, but the only information that identifies a Bitcoin user is a Bitcoin address, making the transaction anonymous. Or at least somewhat anonymous. As the FBI points out in its report, the anonymity depends on the actions of the user.

Since the IP address of the user is published online with Bitcoin transactions, a user who doesn’t use a proxy to anonymize his or her IP address is at risk of being identified by authorities who are able to trace the address to a physical location or specific user.

And a report published by researchers in Ireland last year showed how, by analyzing publicly available Bitcoin information (such as transaction records and user postings of public-private keys) and combining that with less public information that might be available to law enforcement agencies, such as bank account information or shipping addresses, the real identity of users might be ascertained.

But the FBI helpfully lists several ways that Bitcoin users can protect their anonymity.

Create and use a new Bitcoin address for each incoming payment.

Route all Bitcoin traffic through an anonymizer.

Combine the balance of old Bitcoin addresses into a new address to make new payments.

Use a specialized money laundering service.

Use a third-party eWallet service to consolidate addresses. Some third-party services offer the option of creating an eWallet that allows users to consolidate many Bitcoin addresses and store and easily access their Bitcoins from any device.

Individuals can create Bitcoin clients to seamlessly increase anonymity (such as allowing users to choose which Bitcoin addresses to make payments from), making it easier for non-technically savvy users to anonymize their Bitcoin transactions.

But the bigger risk for crooks and others who use Bitcoin might not come from law enforcement identifying them, but from hackers who are out to rob their virtual Bitcoin wallets dry.

Last year, computer security researchers discovered malware called “Infostealer.Coinbit” that was designed specifically to steal Bitcoins from virtual Bitcoin wallets and transfer them to a server in Poland.

One Bitcoin user complained in a Bitcoin forum that 25,000 Bitcoins had been stolen from an unencrypted Bitcoin wallet on his computer. Since the exchange rate for Bitcoins at the time was about $20 per Bitcoin, the value of his loss at the time was about $500,000. A popular Web hosting company called Linode was also infiltrated by an attacker looking to pilfer Bitcoins.

And there have also been cases of hackers attempting to use “botnets” to generate Bitcoins on compromised machines.

According to the FBI, quoting an anonymous “reliable source,” last May someone compromised a cluster of machines at an unidentified Midwestern university in an attempt to manufacture Bitcoins. The report doesn’t provide any additional details about the incident.

Psh. Bitcoin isn't ideal for criminals, because it still has to be converted to a real currency for there to be any value. I'd be shocked if intermediaries don't have to report their businesses to the FBI if based in the US.

Psh. Bitcoin isn't ideal for criminals, because it still has to be converted to a real currency for there to be any value. I'd be shocked if intermediaries don't have to report their businesses to the FBI if based in the US.

It's a token of anonymity for which the value of a transaction can be hidden from view while it transfers from one person to another. There are enough exchange points in existence and none of the exchange operators are responsible for running a background check on the exchangers involved. Since currency exchanges are also confidential as long as those involved square away any obligations to the government, local or otherwise, it becomes the perfect medium for those who are engaged in illicit trade.

I believe strongly that the greatest attribute of America has always been her work ethic, and unfortunately I've seen many examples of the newest workforce generation sorely lacking it. In far greater numbers than any previous generation.

Would you not agree this is because work ethic and success are no longer rewarded with the equity that occurred in previous generations.

Last time the banking system almost collapsed you had bankers throwing themselves of the buildings.

This time they're still popping the champagne corks and getting billions in bonuses.

Given the above, what would be the point of having a strong work ethic? Why wouldn't the young want to rage against the injustice that is apparent when the CEO's of today still get bonuses despite the companies they run completely failing?

It's clear how Bitcoins retain value (scarcity), but it's not clear as to how they attain value.

That's like saying: It's clear how the USD retains value (scarcity) -- the actions of the US Government -- but it's not clear how the USD attains value.

Bitcoin has value because, to put the point rather crudely, (some) people treat it as having value. That is, people accept it as a unit of exchange for goods and services. (The same basic point applies to the question 'why does the USD have value'.)

USD has value partly because the US Government accepts it in payment of taxes and US courts accept its use in clearance of debts. Other acceptors tend to accept USD because they can pay their taxes this way, or perhaps their suppliers can. Bitcoins will never have this advantage, and there is no particular reason these mathematical curiousities can't be abandoned as boring because some new fad comes along, so Bitcoin will never have the various factors which make USD holdings more stable, e.g. repudiation of payments you did not authorise.

It's clear how Bitcoins retain value (scarcity), but it's not clear as to how they attain value. I read the wiki article and their FAQ and am still unsure. Is the equity of a single bitcoin tied in the processing required to "unlock" a block?? What sort of equity is that? It's not tangible at all.

Even paper money (at some point) was tangibly correlated to some kind of capital (gold, land, cattle), etc. Is Bitcoin's capital in power (electricity) consumed? Can someone please explain?

Different people are interested in the currency for different reasons, one of the most important ones being anonymity and the (possible) ability to bypass law enforcement, tax collectors and the like. Those reasons are what give the currency its value, not the labor/electricity expended. On its part, Bitcoin creates an artificial scarcity by placing an upper limit on the total number of coins that will ever be in existence, and ramping up the effort (time and money) required to generate new coins everytime a block is "unlocked," or whatever.

As for tangibility, what's so special about the Mona Lisa. It's simply a painting of some random woman. Why is it so much more valuable than the stick figures drawn by a child? And what are diamonds but mere sparkling stones?

The sense of self-entitlement and instant-gratification that pervades the latest crop of college grads is frightening. While previous generations have always had their "rebels" if you will, today this is becoming the norm.

I am not an employer, so I cannot speak to the work ethic of one generation vs. the next.

I think a LOT of the rebelling is against laws that have become too restrictive, corporations that have become too greedy, and a sense that things are getting worse, not better.

A few for instances: There used to be an idea that if you worked faithfully for a company, you'd get a pension, and the company would "back you" as far as it could. Now, most workers are just cogs, to be thrown out if the CEO and shareholders want bigger gains. Also, many employers seem to have unrealistic requirements for their positions. A college degree for a help desk position. Really?

I've also seen a disturbing trend among employers who have people doing repetitive work always looking for improvement from their employees, not matter the plateau they've attained. Packaging companies, help desks, and any number of similar jobs will have a realistic "packages per minute" or "closes per hour". When that realistic "average" bar is bumped up to that level you attained under overtime when there was a "push", it builds contempt and frustration in your employees. Sure, you need a little extra from me for a week or two, I'll give it, but don't make THAT the new "average". Especially when you keep reinforcing that we're replaceable assets - like we didn't already know this.

Media companies, in particular, are doing everything they can to make you "pay per view" for any particular movie or show you'd like to watch. And not just pay per view, but forcing their PAYING customers to watch their propaganda, previews, FBI warnings, and any other junk they want to shove down your throat when you actually purchase their titles. (The music companies would've liked to have done this as well, but because CDs aren't encrypted, and iTunes dominated for so long, they pretty much lost this battle on the home front. They're still fighting the good fight in restaurants, radio stations, and other businesses.)

Along with all the control they want to inflict, they also push for ever bigger and badder punishments for infringement. They push the government to give their corporations policing, spying, and almost judicial power over individuals and businesses. I won't say they don't make music or movies worth watching, but in every other regard they seem to be actively insulting, attacking, and / or restricting those who try to be their customers.

Now that corporations are "people", seemingly with most the rights, but little to none of the responsibility, it is dubious how much individual or grass lobbying can affect the Senators and Representatives that are supposed to represent The People. More than ever it seems they represent the corporations, and the way has been paved for corporations to legally pour god awful tons of cash into a campaign. In the case of the media companies, they can also peddle influence since they still reach so many people, and I believe that's one of the reasons they seem to have a disproportionate voice in our government, even taking into account the money they spend.

We also seem to be shredding the constitution at every opportunity. Warrant-less e-mail tapping, or cell phone tapping, GPS tracking, etc. Torture? When did torture - including "non-torture torture" such as water boarding become acceptable? Why is it acceptable to hold anybody without trial indefinitely?

Does that mean I think it's okay to download the latest episode of a TV show or movie before it even airs in your area? No. I do believe that a lot of the things that previous generations took for granted - some semblance of stability in their jobs, a bit of restraint in the government - and the government not being afraid to restrain the excesses of corporations, no longer hold. I think the "Powers that be" are doing what they can to tip the scales all in their favor, and that if there's too much of that, it provokes a "Well #$(&@@# you too" attitude for those affected by it.

I believe strongly that the greatest attribute of America has always been her work ethic, and unfortunately I've seen many examples of the newest workforce generation sorely lacking it. In far greater numbers than any previous generation.

... But unlike traditional currencies, you can divide bitcoins much, much smaller than 1/100th. (A penny) So when bitcoins run out but the bit coin economy grows, things will become "cheaper" for anyone holding bit older coins. Meanwhile bitcoins, while being divided more and more will still be able to fetch the same thing in local, real-world markets.

In other words, it's an attempt by a few geeks to take over the world due to "jumping on the bandwagon first". I heard something like 8 million BTCs out of a total of 21 million (ever!) have already been mined.

I don't have any good estimates of "total wealth in the world", but let's say the one-world-government/one-world-currency conspiracy comes true. And, let's just use a WAG of 21 quadrillion US dollars for the worth of "everything" in the world right now. That makes EACH bitcoin (currently $20-40) worth on the order of $1 BILLION. Talk about a possibly HUGE return on investment - buy two graphics cards for $500, mine a few BTCs, wait 50 years, and all of a sudden, you're Bill Gates. Those 8 million BTCs (roughly 1/3 of all BTCs ever) might some day be worth $7 quadrillion US dollars. IF Bitcoin takes over.

Of course, there are a lot of people with a lot less scruples than a few geeks who wouldn't want to see that happen, since they'd be poor after a lifetime of being rich. And BTCs can be stolen much easier than emptying a bank account, when we're talking about large sums. It's anonymous, can't be traced, is one-way, etc. Just hold a gun to someone's head, and force them to reveal their BTC password. In today's banking world, just about anything can be reversed - not with BTC!!

Not to mention: talk about setting up the system to fail: it's pretty much guaranteed that bitcoins will become worth MORE over time, as we create more wealth. So, in 2050, a new Corvette costs $0.001 BTC. Then, in 2100, it's $0.0001. No one will want to sell their houses (from a psychological standpoint) because they'll be worth a fraction (in terms of number) of what they paid for it, etc. The next generation will pretty much HAVE to rebel to have a shot at a decent life..

Different, though, because within the United States people are required to treat the dollar as having value. Within some limitations, obviously, but a dollar must be accepted to satisfy a debt within the U.S., and in most other countries official currency is treated similarly. Whereas if you try to pay me back with bitcoins, I can tell you to hit the road.

Mostly incorrect. Paper dollars are legal tender which must be accepted for debts denominated in U.S. dollars. Originally this was to prevent people from shunning paper money by demanding real gold and silver dollars. Note that such legal equivalencies form the prerequisites for Gresham's Law, where bad (paper, in this case) money drives good money (gold and silver) from circulation into private holdings.

Denominating debts in yen, euros or bitcoins is perfectly legal. If you tried to pay off a shilling-denominated debt in dollars, the lender could tell you to hit the road.